ADP/ACP Testing

I have a 401(k) plan with 2 participants; the business owner and one employee.

The business owner is over age 50 and makes catchup contributions. The plan also makes matching contributions - 50 cents for each dollar contributed and catchup contributions are matched.

The other NHCE employee defers 6.71% and gets a 3.36% matching contribution; so top heavy is satisfied.

I have a failing ADP test, but am able to pass by recharacterizing part of the owner's deferrals as catch up contributions. Here are the owner's percentages (before catch up recharacterization) 11.02%-ADP and 5.51% ACP

I also have a failing ACP test (only slightly) and would like to "shift" part of the ADP to the ACP, so that the ACP test passes. The numbers work and allow a shift of .15 from the owner's deferrals and .30 from the NHCE's deferrals. After the shifting and recharacterizing the catch up, the plan passes the ADP/ACP tests.
(Per the ERISA Outline book stating the using "shifting" on a failing ADP is an aggressive position.)

The ERISA Outline book says the plan may not apply the recharacterization rule first. All testing must be completed, including the shifting of elective deferrals if desired, before determining whether there are any remaining excess contributions that would be distributable but are eligible for recharacterization as catch up contributions.

Plan is using current year testing method.

So, in my way of thinking, this would be an acceptable way to pass the test, provided the client wanted to use an aggressive position.

Just wanted to get input and see if anyone else have done any shifting in passing ADP/ACP tests.

Scrappy, no one wants to answer your post, so you must have hit a sensitive subject.

I'll take a stab at it though:

In my opinion, you should stay away from what you're trying to do. Before you can shift deferrals to the ACP, your plan must be able to pass ADP with and without the deferrals shifted.

The HCE who is supposed to get a refund is catch up eligible, so you "cure" your ADP failure by recharaterizing his deferrals to catch up contributions. In my opinion, your plan still failed ADP, you just used the recharacteriztion method to correct the failure (as opposed to QNECs or distributions.)

In prior posts, some administrators had expressed differing opinions, arguing that your ADP test was passing since you didn't have any refunds due to the catch-up recharacterization.

Incidentally, how much would a QMAC be? You're only failing by .15%, if the NHCE is making between 20-60k, that's a QMAC between $30 and $90. It seems like a better option than having to deal with refunds and tax filing or audit roulette.